How a Few Monster Tech Firms are Taking Over Everything from Media to Space Travel and What it Means for the Rest of Us

The iconic view of tech companies almost invariably stress their roots in people’s garages, plucky individual entrepreneurs ready to challenge all comers. Yet increasingly the leading tech firms – Amazon, Apple, Facebook, Amazon and especially Google – have morphed into vast tech conglomerates, with hands in ever more numerous, and sometimes not obvious, fields of endeavor.

Ironically, the very entrepreneurial form that defeated Japan’s bid for global technological dominance is morphing into an American version of the famed keiretsu that have long dominated the Japanese economy. The keiretsu,epitomized by such sprawling groups as Mitsubishi, Sumitomo and even Toyota, spread across a vast field of activities, leveraging their access to finance as a means to expand into an ever-increasing number of fields. The can best be understood, notes veteran Japan-based journalist Karel van Wolferen, as a series of “intertwined hierarchies.”

Increasingly, American technology is dominated by a handful of companies allied to a small but powerful group of investors and serial entrepreneurs. These firms and individuals certainly compete but largely only with other members of their elite club. And while top executives and investors move from one firm to another, the big companies have constrained competition for those below the executive tier with gentleman’s agreements not to recruit each other’s top employees.

At the top of the American keiretsu system stands a remarkably small group whose fortunes depend in part on monetizing invasions of privacy to use the Internet as a vehicle for advertising. These are not warm and cuddly competitors. Both Google and Microsoft have been accused of using anti-competitive practices to keep out rivals, in part by refusing to license technology acquiring of potential competitors.

“Tech is something like the new Wall Street," notes economist Umair Haque,“Mostly white mostly dudes getting rich by making stuff of limited social purpose and impact.”

Like their soul brothers on Wall Street , America’s elite tech firms – and their owners – have become fantastically cash rich. Besides GE, a classic conglomerate, the largest cash hordes now belong to Apple, Microsoft, Cisco, Oracle and Google, all of whom sometimes have more dollars on hand than the US government. Seven of the eight biggest individual winners from stock gains in 2013 were tech entrepreneurs, led by Jeff Bezos who added $12 billion to his paper wealth, Mark Zuckerberg who ranked in an additional $11.9 billion while Google founders, Sergey Brin and Larry Page, had their wallets expanded by roughly $9 billion.

This wealth reflects in large part the oligopolistic nature of many key tech sectors, for example, the Apple-Google duopoly on mobile phone software, Microsoft’s dominant position in operating systems for PCs, Google’s utter control of search, and Facebook’s domination of social media. In most cases, these fields are controlled at levels of eighty percent or more.

America’s new gilded age giants are similar to Japan’s keiretsu but they also share a lineage with the early 20th Century trusts that controlled railroads, cotton, silver and other commodities. Those early fortunes helped provide the foundation for such banking firms as J.P. Morgan, Goldman Sachs, Oppenheimer, and Lehman Brothers, as well as the basis for the Rockefeller and Hearst empires. Their wealth, in the era before income taxes, was immense; by the 1880s the revenues of Cornelius Vanderbilt’s railroad empire were greater than those of the federal government.

The control of immense resources by a small group of tech firms, like the oligopolies of the earlier industrial magnates, produces a steady cash-flow them to look further afield for new opportunities and expand into potentially huge new markets. But even more importantly, it gives them the opportunity to fail and still live to acquire another day.

Google’s recent sale of Motorola’s mobile division, at a paper loss of nearly $10 billion, would have led to bankruptcy head-rolling at many firms but for Google it hardly left a scratch. A $10 billion failure barely threaten a company whose last quarterly revenues neared $17 billion, has cash on hand of over $56.5 billion and whose market cap is now nearly $380 billion.

Indeed, if any of the tech powers on track to become a full-fledged keiretsu, it’s likely to be Google. Over the past year the company has ventured into a host of fields, such as robotics, energy, mapping, and driverless cars – fields that have great potential but are only tangentially related to their core business. The recentacquisition of Nest, a company founded by Apple alum Tony Fadell , brings Google into the “smart home” marketplace, part of the so-called “internet of things”. This gives these firms a new capacity to harvest ever greater information hauls from your once “dumb,” but at least private, household appliances.

These investments and cross-industry ties are changing firms like Google in fundamental ways. As industry veteran Michael Mace observes, Google has stopped being a “unified product company” and is turning instead into what he calls “a post-modern conglomerate.” Its goal, he notes, is no longer to dominate search, or even the internet, but to invest, and hopefully, control anything that uses information technology, including everything from logistics and medical devices to the most mundane household devices.

By investing widely and eating up developing markets, the “the Gang of Four” internet companies—Microsoft, Apple, Facebook and Google—have two key advantages: almost unlimited capital resources, and tech expertise and credibility. Allied with venture firms, and a vast reservoir of technical experts, the tech oligarchies, for example, already dominate such promising fields robotics, with Silicon Valley home to half of all venture invested in the field, over 70 percent of employees, and a whopping 90 percent of market cap.

Others are turning to space, a field once dominated by NASA, once a key contractor for the Valley. Headquartered in the old aerospace center of Los Angeles, Space X, the largest of the space startups, was founded by billionaire Elon Musk, who previously founded PayPal and Tesla. By 2013, Space’s X’s total employment, including contractors, topped 3800.

Musk is not alone in the space game. Amazon CEO Jeff Bezos founded his own private space exploration company, Blue Origin, which has launched two vehicles into space, Charon and Goddard. It intends to build orbital space stations, and serves as a contractor for NASA. Like the nascent space industry’s third new player, Richard Branson’s ‘Virgin Galactic,’ these firms are all the pet projects of billionaires fascinated by space. If NASA continues to retreat from many areas of space exploration, it is likely that in the future the heavens too may end up belonging to the oligarchs.

The Media power-shift

A Google or Amazon space-ship may still be in the distant future, but we can already see the impact of the new keiretsu on information and culture. In the past, more hardware-oriented companies provided the “pipelines” through which traditional media disseminated their product. But increasingly, it’s the tech oligarchs who control the news and information industry.

Google, by some estimates, already enjoys more advertising revenues than either the newspaper or magazine industry. And they’re positioned to take over the the hardware side by supplanting the traditional telecommunications companies with their own series of global pipelines.

This big tech takeover also previews a geographic shift from traditional centers of power like New York and Los Angeles to the new seats of influence, most notably Silicon Valley, San Francisco and the Puget Sound area.

The transitions of power and influence have come at heavy costs.

As the new software-based media expanded over the last decade, massive losses have pummeled newspapers, music, book and magazine publishing Since 200. The paper publishing industry, traditionally concentrated in the New York area, has lost some 250,000 jobs, while internet publishing and portals generated some 70,000 new positions, many in the Bay Area or Seattle.

To the new oligarchs, the old media are just part of what one venture capitalist derisively called “the paper economy” destined to be swept away by the new digital aristocracy. As relatively young people who have already amassed fortunes, the tech giants have the time to disseminate their views to the public, both the mass and the influential higher echelons. Another $200 million new venture with a mission to support largely left of center investigative reporting, is being backed by eBay founder Pierre Omidyar.

Buying up prestigious media outlets, an old tactic for consolidating influence that was previously used by gilded age moguls like William Randolph Hearst, has surfaced among the new tech giants, exemplified in the recent purchase of the venerable New Republic by Facebook co-founder, and Obama tech guru, Chris Hughes, who is reportedly worth $850 million.

But perhaps more critical than buying old outlets will be the growth of their own oligarch controlled news media. Yahoo is now the #1 news sites in the U.S. with 110,000,000 monthly viewers, and Google News isn’t far behind at #4 with 65,000,000 users. The Valleyites are also moving into the culture business with both YouTube (owned by Google) and Netflix now creating original entertainment content.

The tech firms control over media is likely to become even more pervasive as the millennial generation grows and the older cohorts begin to die off. Among those over 50 only 15 percent, according to a Pew report get their news over the internet; among those under 30, the number rises to 65 percent.

Impact on Innovation

Is this concentration of tech power a good thing? To some extent, the country benefits from having a Google, Amazon, Microsoft or Apple at the forefront of such fields as healthcare, robotics and space. They possess the resources and the technical know-how to develop and market new product lines that smaller, more specialized start-ups might lack.

Indeed the shift of resources from social media and advertising to robotics or space travel has to be considered a basically positive development. Unlike the social media revolution, which appears to have done relatively little to benefit the overall economy, the developments in space travel or driverless cars, may provide advantages that are more widely shared.

Yet, there is also a major problem with over-rich and over-confident oligopolies. It’s a lesson demonstrated by Japan’s arc over the past two decades and in the story of the big three US automakers and their era of domination – both examples show how concentration of power can stifle innovation and positive growth. Already some economists see a slowing in the pace of technical breakthroughs. In the 1980s personal computer boom, scores of companies competing across a broad array of tech sectors resulted in few long-term winners but a rapid evolution of technology. In contrast, it is not easy to argue that Google’s search function or Microsoft’s code are any better today than they were three or even five years ago.

As the tech firms move further from their entrepreneurial roots, one critic notes,many take on “a timid, bureaucratic spirit” that responds to the needs of investors and focuses on preserving already established business lines.

Would we be better off with say, a garage-bound Steve Jobs developing the software for robotics, rather than having development managed in a corporate structure that answers the demands of Wall Street analysts? Trusting a small, often closely knit group of investors, to oversee critical industries of the future, does not seem to be the best strategy to maintain and deepen our technological lead.

Digital innovation should be spurring the creation of new competitive companies. Yet, instead it is fostering an American version of the Japanese keiretsu, where firms like Amazon, Google, Apple and Microsoft try to use their unfathomable riches to dominate the entire technological future. This is not a step forward but one that can limit Americans’ ability to renew the entrepreneurial genius at the heart of our national character.

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I agree with Mr. Barnes, but my time machine is better than his. I went all the way to 2050. I can report that Google is struggling, and is no longer in the Fortune 500. Search has been taken over by open-source software run on a distributed network, and it no longer provides any income to anybody.

I usually like Mr Kotkin's columns, but this article is a bit of a logical mess (without even considering the typos).

“Tech is something like the new Wall Street," notes economist Umair Haque,“Mostly white mostly dudes getting rich by making stuff of limited social purpose and impact.”

My word. People are actively using their services and advertisers are paying serious money to put their ads on these sites, so who is anyone to say that there is little social purpose or impact unless you want to take the view that some higher authority ought to be determining what people can buy? As an old dog I don't have a Facebook page, am not a Twitter follower, lost interest early on in Flickr, and am kind enough to the world to not post naked photos of myself (even quickly disappearing ones on Snapchat). But if others want to do this who am I, Mr Kotkin or Mr Hague to say that they shouldn't?

Mr Kotkin also gets into a logical mess when he observes that the giant tech companies are investing (and taking risks) in a variety of endeavours, and then later frets that these firms may become bureaucratic and sclerotic and stop innovating. Given his obvious dislike for these firms, you'd think he'd be hoping for the latter.

Certainly it is true that much traditional print media is facing severe financial pressures, but there is more news and information readily available on the internet than most of us ever got from the morning paper. Furthermore, Google or Yahoo are essentially the equivalent of the delivery vans that used to get the news to stores or our homes, not the creators of the content. If anything hammered the print media industry it was Craigslist.

I think he is on a bit more solid ground regarding encouraging the old garage start-up. Perhaps he should consider that US tax laws encourage corporations to keep their foreign earnings abroad rather than to repatriate them and pay them out in dividends. Investors in these firms would generally like to seem them pay out more to shareholders, but they don't want to see the company's take a 35% tax hit (plus state taxes so really over 40%). So, the cash remains abroad and ultimately the companies will spend much of it abroad. Why doesn't Mr Kotkin advocate that these firms be permitted to bring foreign earnings back tax free where investors will pressure for more dividends, and ultimately some of that money will find its way to garage start-ups.

In past columns Mr Kotkin has argued that tech workers tend to favor the sorts of housing, zoning and tax policies that tend to push out blue collar workers. He is on pretty solid ground with that type of criticism. Here he is essentially ranting that he doesn't like big tech companies and presumably thinks something should be done about them without really explaining how any of us have been damaged by Google, Facebooks, Microsoft or Apple (other than briefly touching on privacy, which is a fair issue for concern).

I find this article a reasoned portrayal of an important issue. Elementary economics states that monopolies work against the common good, whether they are robber-baron style monopolies in railroads and oil, or 21st century monopolies in media and communication. This is basic best practice, because monopolies limit competitiveness and reduce innovation, leading to poorer and poorer service. The market suffers from monopolies in this way.

More insidious, however, is the cultural monopoly that these tech firms are leading us to. All too dire warnings by Jaron Lanier and others have already cited the damage to our friendships and relationships when they are reduced to the digital level, losing nuances and subtleties that mark our "meatspace" existence. They degrade and monetize our relationships into "friends" and "likes" and other such facebooky nonsense.

However, among the criticisms of some tech companies is that Microsoft completely missed search and social networking and it's stock is well below its 2000 high. Apple was a mess for years though a more mature Steve Jobs returned to make a remarkable turnaround. Yahoo is often criticized for being an also ran. Concerns abound that Facebook is no longer cool with the kid, though I hesitate to speculate on it as I'm one of the oldsters (albeit a Silicon Valley resident) who never cottoned to the idea of putting my life online. Google is a juggernaut, but there have been many juggernauts over the years that eventually stumbled.

What do you propose? That some companies be stopped in their tracks simply because they are too successful? I think you need more evidence that they've cause harm beyond promulgating facebooky nonsense.

Kotkin is close but misses with his question. "Is this concentration of tech power a good thing?" It's not the concentration of tech power, but cash that is a problem. Those huge piles of cash belong to the shareholders, but are controlled by the few executives as their personal investment funds. Everybody makes investment mistakes, but these concentrations allow a few to make really big investment mistakes as you observe about so may of these juggernauts.

What should be done is that there should be a legal mandate for all cash in excess of the prior three months' operating expenses (or some other objective standard) to be dividended to the shareholders and the corporate income tax repealed. If the company wished to make investments, it would have to go back to the market and raise capital, just like a startup. Level the playing field.

Well, that's a little draconian in my view. Companies that grow rapidly often tend to suck up cash like a vacuum cleaner, and the prior three month's operating requirements may not be an accurate indicator of the next quarter's needs. Raising money in the market can also be a little slow sometimes, though borrowing can be faster. I'd keep it a little simpler. Let the companies bring the funds back without taxation (and repeal all corporate income tax too as far as I'm concerned), and then let management (under shareholder pressure) decide what dividends to pay or not.

consists of selling stock. Shareholders have no pressure to apply to management. Nor do boards, until the scandal is on the front page of the WSJ. As I said, I'd be happy to consider an alternative objective measure, but there must be one that forces management to dividend excess cash back to shareholders instead of hoarding or splurging on pet projects. We would have much better corporate accountability and communication that way and much better resource allocation for the economy.